Pan African Resources FY21 production results

Exceeding expectations (as usual) Metals & mining

21 July 2021
Pan African (PAF) announced its operational results for the year ended 30
June 2021 on 13 July, with output for the full year 6,609oz (3.4%) higher Price 16.66p
than PAF’s own guidance of 195,000oz from as recently as May 2021 and Market cap £372m
7,383oz (3.8%) above Edison’s forecast. All of the substantive ZAR19.7861/£, ZAR14.3087/US$, US$1.3821/£
outperformance could be attributed to operations at Evander underground, Net debt (US$m) at end June 2021* 33.8
which more than made up for an early shortfall in production in H121. *Excludes c US$5.0m in IFRS 16 lease liabilities
Otherwise, group net senior debt was reported to be very close to Edison’s
prior forecast, at US$33.8m, and production guidance for FY22 was Shares in issue 2,234.7m

confirmed at 195koz. *Effective 1,928.3m post-consolidation

Free float 86%

Revenue PBT* EPS* DPS P/E Yield Code PAF

Year end (US$m) (US$m) (c) (c) (x) (%)
06/19 218.8 37.1 1.64 0.15 14.1 0.6 Primary exchanges AIM/JSE
06/20 274.1 80.8 3.78 0.84 6.1 3.6 Secondary exchange OTCQX Best Market
06/21e 369.0 122.4 4.24 1.01 5.4 4.4
06/22e 340.9 144.0 5.18 1.04 4.4 4.5 Share price performance
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and
exceptional items.

Output at Evander underground surges

While production from Evander underground surged in H221, production at
Barberton underground benefited from increased mining footprints on four cycling
production platforms. Simultaneously however, production was restrained at
Elikhulu as a result of unexpected concentrations of carbonaceous material in the
lower benches of the Kinross dam that we estimate probably reduced gold
% 1m 3m 12m
recoveries from c 47.8% to c 42.6% (nevertheless in line with H220 and H121).
Abs (6.9) (8.1) (30.2)

Two new growth projects Rel (local) (5.3) (8.4) (38.6)

Recent initiatives have resulted in the addition of two new assets to PAF’s portfolio 52-week high/low 27.1p 15.4p
of growth projects in the form of Mintails/Mogale and the 8 Shaft decline 24 Level Business description
project. Early indications suggest that these could be worth in the order of 5.3c
Pan African Resources has three major producing
(3.8p) and 0.5c (0.3p) in value to PAF’s shares, respectively, as a result of which it precious metals assets in South Africa: Barberton
has reprioritised its capex commitments to implement a phased approach to the (target output 95koz Au pa), the Barberton Tailings
development of Egoli in such a way as to minimise upfront capex and thereby Retreatment Project, or BTRP (20koz), and Elikhulu
materially reduce the requirement to raise debt to fund the project. (55koz), now incorporating the Evander Tailings
Retreatment Project, or ETRP (10koz).

Valuation: Eyeing 43.84c (31.72p) per share plus Next events

On a like-for-like basis, our forecasts and core valuation of PAF have risen a Egoli investment decision Mid-CY21

modest 1.5% to 38.76c/share based on the production update. However, the FY21 results September 2021
valuation stands to rise by an additional 13.1%, to 43.84c/share, in the event of the FY21 dividend payment date December 2021
successful development of Mintails/Mogale and the 8 Shaft decline 24 Level project Mintails/Mogale due diligence Until January 2022
(see Exhibit 6). To this must then be added the value of c 19.2m underground
Witwatersrand ounces, which we estimate could lie anywhere in the range of 0.22– Analyst
5.24c to take the total to 44.06–49.08c/share. Alternatively, if PAF’s historical Charles Gibson +44 (0)20 3077 5724
average price to normalised EPS ratio of 9.1x in the period FY10–20 is applied to mining@edisongroup.com
our FY21 and FY22 forecasts, it implies a share price of 27.9p in FY21 followed by Edison profile page
34.0p in FY22.
Pan African Resources is a
research client of Edison
Investment Research Limited
 FY21 production results
Pan African announced its operational results for the year ended 30 June 2021 on 13 July.
Production in H121 was already known; nevertheless, production for the full year was 6,609oz
(3.4%) higher than PAF’s own guidance of 195,000oz from as recently as May 2021, and 7,383oz
(3.8%) above Edison’s forecast for the year. As a result, the group’s production profile grew, rather
than declined, in H221 compared to H121. In percentage terms, the increase was enhanced when
analysed on a half year basis, as shown in the exhibit below.

Exhibit 1: PAF production, FY18–21 (oz)

Operation H118 H218 H119 H219 H120 H220 H121 H221e H221a Change* Variance** FY21a FY21e
(previous) (%) (%) (previous)
Barberton UG 32,159 40,966 38,550 36,806 36,737 31,392 42,350 41,551 42,469 +0.3 +2.2 84,819 83,901
BTRP 8,452 9,052 12,006 12,001 10,619 9,516 10,004 9,393 8,231 -17.7 -12.4 18,235 19,397
Barberton 40,611 50,018 50,556 48,807 47,356 40,908 52,354 50,944 50,700 -3.2 -0.5 103,054 103,298
Evander UG 32,734 15,831 8,821 8,058 11,553 9,117 12,607 17,314 23,352 +85.2 +34.9 35,959 29,921
ETRP 11,937 9,313 6,345 3,654 4,731 6,176 6,560 0 4,561 N/A N/A 11,121 6,560
Evander 44,671 25,144 15,166 11,712 16,284 15,293 19,169 17,314 27,913 +45.6 +61.2 47,080 36,483
Elikhulu 0 0 15,292 30,909 29,301 30,315 26,863 27,582 24,610 -8.4 -10.8 51,473 54,445
Total 85,282 75,139 81,014 91,428 92,941 86,516 98,386 95,840 103,223 +4.9 +7.7 201,608 194,226
Source: Edison Investment Research, Pan African Resources. Note: *H221 cf H121; **H221a cf H221e. Totals may not add up owing
to rounding. UG = underground.

While production from the Barberton complex was broadly in line with our expectations and that
from Elikhulu was slightly below, all of the outperformance could be attributed to operations at
Evander underground. Output at Evander underground was restrained by a ventilation shaft lining
fracture in H121 as well as technical difficulties relating to the pseudo packs used for ground
support (now overcome) and lower than usual metallurgical recoveries (although this was, to some
extent, counterbalanced by head grade, which, at an estimated 8.51g/t, was 11.0% above our prior
forecast of 7.67g/t). In the event, however, Evander’s performance in H221 not only returned output
levels to those expected for the six-month period, but also more than made up for the shortfall in
the first half as well. Over the same period, production at Barberton underground benefited from
increased mining footprints on the 256, 257, 258 and 358 platforms, thereby engendering greater
mining flexibility. Throughput at Elikhulu was restricted on account of remedial work on the its tailing
storage facility’s lower compartment. This was largely anticipated in our note at the time of the
company’s interim results (see Record interim profitability, published on 3 March 2021). In addition,
however, unexpected concentrations of carbonaceous material in the lower benches of the Kinross
dam negatively affected gold recoveries, which we estimate must have been in the order of 42.6%
(in line with H220 and H121 but below our prior expectation of 47.8% for H221).

Updated H221e and FY21e forecasts

We have updated our forecasts for H221 and FY21 in the light of the production results reported by
Pan African as well as a slightly lower gold price during H221 (US$1,805/oz cf our previous forecast
of US$1,828/oz) and a slightly stronger rand against the US dollar, in particular (ZAR14.54/US$ cf
our previous forecast of ZAR14.60/US$). While our estimate of full-year revenue has increased by
US$12.1m to reflect higher than expected production during the year and half year, this increase
was counterbalanced by an only slightly smaller increase in cash costs as higher-margin production
from Elikhulu was supplanted by lower-margin production from Evander to leave our earnings
expectations, to all intents and purposes, unchanged – albeit at levels for the half year that are
more akin to those typically earned within a full financial year historically.

Pan African Resources | 21 July 2021 2

Exhibit 2: PAF P&L statement by half-year (H119–H221e)
US$000s H119 H219 FY19 H120 H220 FY20 H121 H221e H221e FY21e FY21e
(unless otherwise (restated) (previous) (current) (previous)
indicated)
Revenue 97,531 121,287 218,818 132,849 141,258 274,107 183,751 173,216 185,269 369,020 356,967
Cost of production (70,847) (82,133) (152,980) (86,501) (71,956) (158,457) (98,245) (97,564) (109,312) (207,557) (195,808)
Depreciation (6,840) (9,388) (16,228) (10,526) (10,977) (21,503) (12,741) (16,012) (16,020) (28,761) (28,753)
Mining profit 19,844 29,767 49,611 35,821 58,325 94,146 72,766 59,640 59,937 132,703 132,406
Other income/(expenses) (2,077) (5,181) (7,258) (962) (27,720) (28,682) (6,704) 0 0 (6,704) (6,704)
Loss in associate etc 0 0 0 0 0 0 0 0 0 0 0
Loss on disposals 0 0 0 0 0 0 0 0 0 0 0
Impairments 0 17,854 17,854 109 (20) 89 0 0 0 0 0
Royalty costs (474) 120 (354) (208) (266) (474) (2,404) (1,678) (1,778) (4,183) (4,083)
Net income before finance 17,293 42,559 59,852 34,761 30,319 65,079 63,657 57,962 58,159 121,816 121,619
Finances income 443 407 850 207 258 465 300
Finance costs (5,699) (7,343) (13,042) (7,760) (5,587) (13,346) (3,946)
Net finance income (5,256) (6,936) (12,192) (7,553) (5,329) (12,881) (3,646) (2,507) (2,507) (6,153) (6,153)
Profit before taxation 12,037 35,623 47,660 27,208 24,990 52,198 60,011 55,455 55,651 115,662 115,466
Taxation (2,325) (5,850) (8,174) (5,303) (2,602) (7,905) (19,239) (21,224) (21,275) (40,513) (40,462)
Effective tax rate (%) 19.3 16.4 17.2 19.5 10.4 15.1 32.1 38.3 38.2 35.0 35.0
PAT (continuing ops) 9,712 29,774 39,486 21,906 22,388 44,293 40,773 34,231 34,376 75,149 75,004
Loss from discontinued ops N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Profit after tax 9,712 29,774 39,486 21,906 22,388 44,293 40,773 34,231 34,376 75,149 75,004

Headline earnings 9,712 14,586 24,298 21,742 22,416 44,158 40,772 34,231 34,376 75,148 75,003
Est. normalised headline 11,789 19,766 31,556 22,704 50,136 72,840 47,476 34,231 34,376 81,852 81,708
earnings

EPS (c) 0.50 1.54 2.05 1.14 1.16 2.30 2.11 1.78 1.78 3.90 3.89
HEPS* (c) 0.50 0.76 1.26 1.13 1.16 2.29 2.11 1.78 1.78 3.90 3.89
Normalised HEPS (c) 0.61 1.03 1.64 1.18 2.60 3.78 2.46 1.78 1.78 4.24 4.24
EPS from continuing ops (c) 0.50 1.54 2.05 1.14 1.16 2.30 2.11 1.78 1.78 3.90 3.89
Source: Pan African Resources, Edison Investment Research. Note: As reported basis. *HEPS = headline earnings per share
(company adjusted basis).

In the context of the above forecasts, readers should note that we estimate that US$23.1m (or
57.0%) of our estimated full-year tax charge for FY21 will have been in the form of deferred taxes
and that cash taxes will have accounted for only US$17.4m (or 43.0%) of the total tax charge of
US$40.5m.

Our updated normalised FY21 headline earnings per share (HEPS) forecast of 4.24c/share
compares with a range of analysts’ expectations from 3.01–3.72p/share, or 4.16–5.14c/share
(source: Refinitiv, 21 July 2021).

Pan African Resources | 21 July 2021 3

 Updated guidance
In addition to its production results for FY21, Pan African also confirmed guidance for production
from the group for FY22 of 195,000oz, including 55,000oz from Elikhulu. Edison has interpreted this
guidance as implying the following levels of production from each of the group’s mines during the
course of the year, which we have compared to FY21 and our prior expectations for FY22, as
follows:

Exhibit 3: PAF production, FY18–22e (oz)

Operation FY18 FY19 FY20 FY21 FY22 FY22 Change* Change* Variance** Variance**
(previous) (current) (oz) (%) (oz) (%)
Barberton UG 73,125 75,356 68,129 84,819 81,487 86,247 +1,428 +1.7 +4,760 +5.8
BTRP 17,504 24,007 20,135 18,235 19,397 18,235 0 0.0 -1,162 -6.0
Barberton 90,629 99,363 88,264 103,054 100,884 104,482 +1,428 +1.4 +3,598 +3.6
Evander UG 48,565 16,879 20,670 35,959 26,400 26,400 -9,559 -26.6 0 0.0
ETRP 21,250 9,999 10,907 11,121 0 9,118 -2,003 -18.0 +9,118 N/A
Evander 69,815 26,878 31,577 47,080 26,400 35,518 -11,562 -24.6 +9,118 +34.5
Elikhulu 0 46,201 59,616 51,473 65,116 55,000 +3,527 +6.9 -10,116 -15.5
Total 160,444 172,442 179,457 201,608 192,400 195,000 -6,607 -3.3 +2,600 +1.4
Source: Edison Investment Research, Pan African Resources. Note: *FY22e cf FY21; **FY22e (current) cf FY22e (previous). Numbers
may not add up owing to rounding. UG = underground.

We have now adjusted our financial model to reflect PAF’s guidance. While this has involved an
increase in forecast production in FY22, guidance for FY22 appears somewhat conservative in the
context of production in FY21. Moreover, there is probably a degree of uncertainty regarding likely
output from Evander in FY22. For the moment, we have retained production from Evander
underground at 26,400oz reflecting solely anticipated output from the 8 Shaft Pillar project, in this
case, supplemented by production of 9,118oz from tolling from surface sources through the ETRP
plant to result in total output from Evander of 35,518oz. However, it is possible that production from
Evander underground will be augmented by the execution of the 8 Shaft decline project (see below)
to maintain production at approximately 34,000oz per annum for the Evander 8 Shaft complex as a
whole. In this case, any additional production from tolling from surface sources (historically of the
order of 10,000oz pa) through the ETRP is likely to result in overall output from Evander in excess
of 35,518oz. The effect of Edison’s adjustments to its model has resulted in a modest, 4.6% decline
in normalised earnings in FY22 to US$99.9m (cf US$104.6m previously) and a similar decline in
normalised HEPS from 5.43c/share to 5.18c/share, albeit with the production caveat noted above
and the observation that this will still represent an increase relative to FY21 and therefore record
earnings and profitability for the group. This compares with a range of analysts’ expectations of
3.60–4.93p/share, or 4.98–6.81c/share (source: Refinitiv, 21 July 2021).

Growth projects
Pan African has recently added two new projects to its existing portfolio of growth projects (already
including Royal Sheba, the Fairview sub-vertical shaft, Rolspruit, Poplar, Evander South etc) in the
form of the Mintails/Mogale project and the 8 Shaft decline 24 Level project.

Mintails/Mogale
One of the assets with the most immediate optionality in the company’s portfolio is Mintails/Mogale,
which could yet prove very similar in nature to Elikhulu, and into which PAF is currently conducting
due diligence with a view to acquiring.

On 6 November 2020, PAF announced that it had entered into a conditional agreement with the
liquidator of Mintails’ assets for the purchase of the total share capital and associated loans of
Mogale Gold Pty Ltd and Mintails SA Soweto Cluster Pty Ltd. Due diligence has been extended

Pan African Resources | 21 July 2021 4

 until January 2022. In the meantime, PAF has successfully concluded both a fatal flaw analysis and
a high-level financial evaluation of the project, which would be similar in nature to Pan African’s
flagship Elikhulu project. Key outcomes of the financial evaluation are as follows:
 An optimal throughput feed of c 0.8Mtpm (cf Elikhulu’s 1.2Mtpm).
 Metallurgical recoveries of c 53% (cf Elikhulu’s 48%).
 An all-in sustaining cost (AISC) of c US$800/oz.
 An NPV10.71 of ZAR1,469m, or US$101.3m at a gold price of US$1,770/oz and a forex rate of
ZAR14.50/US$, or ZAR0.762/share, US$0.053/share or £0.038/share.
 Initial project capital of ZAR1,000m (US$68.9m at ZAR14.50/US$) and life of mine capital of
ZAR1,700m (US$117.2m).
 Average annual production of 44,400oz pa.
 A 12-year life of mine.
 A real post-tax internal rate of return of 42.8%.

The concept study did, however, identify areas that will require further evaluation, including:
 Tailings storage facility deposition capacity constraints.
 The availability of water sources in the area to support re-mining operations.
 Additional test work to confirm metallurgical recoveries.

In the meantime however, by way of comparison, investors should note that Mintails’ and Mogale’s
aggregate resource of 2.36Moz compares favourably to Elikhulu’s original resource of 1.7Moz and
its initial reserve of 1.5Moz, but at a fractionally higher grade of 0.30g/t (cf Elikhulu’s 0.29g/t). PAF
announced the results of an independent definitive feasibility study (DFS) on Elikhulu on 5
December 2016, which demonstrated an NPV9 of US$75.9m (or, then, 5.0c/share, or US$40.95 per
resource ounce) at a gold price of US$1,180/oz and a forex rate of ZAR14.50/US$. At the time,
Edison estimated Elikhulu to be worth US$69.9m (or 4.6c/share) at a 10% discount rate and to be
capable of adding 1.33p to EPS in the first eight years of its operation (albeit there are now 28.0%
more shares in issue). Now however, with capex having been expended (but with not all associated
debt having been repaid), we estimate a current valuation for Elikhulu of c US$136.32 per initial
resource ounce or US$179.08 per residual resource ounce. As such, and albeit with suitable
caveats such as the Mintails/Mogale assets developing in a similar fashion to Elikhulu, PAF could
acquire for US$1.31/oz an asset that should be worth US$9.88/oz as an in-situ resource (see Gold
stars and black holes, published in January 2019), could be worth US$40.95/oz (pre-production)
and may be worth up to US$191.94/oz (post-initial capex and debt repayment).

8 Shaft no. 2 decline 24 Level project

Pan African has continued to maintain the integrity of the underground infrastructure at Evander
even after the end of high-volume, deep-level underground mining in May 2018. While limited
vamping operations have continued since then, PAF has now concluded an internal technical and
economic study into the merits of mining the number 2 decline on 24 Level at 8 Shaft (Phase 1 of
the project) with an option to extend mining to levels 25 and 26 at a later date (Phase 2).

An integral component of the Phase 1 study was the identification of pre-May 2018 problems at
Evander underground and appropriate mitigation of the major challenges encountered during the
mining of the Kinross orebody. These included:

Pan African Resources | 21 July 2021 5

 Exhibit 4: Evander underground challenges and mitigations
Risk
Low efficiencies owing to high temperatures as a result of
inadequate refrigeration capacity
Ore and waste separation
Limited face time owing to long underground travelling times and
distances
Labour intensive ore handling infrastructure based on a
continually rotating three-shift pattern
Source: Pan African Resources, Edison Investment Research.
Mitigation
Installation of a new refrigeration plant for a capital investment of
c ZAR170m (US$22.1m at ZAR14.50/US$)
Underground waste handling and storage facilities to be installed
at a capital cost of c ZAR60m (US$4.1m)
Installation of a man carriage on 24 Level
Reduced tonnage profile requiring only one shift to be manned in
order to meet production targets

To date, the study has yielded the following results for the project:
 An NPV10.71 of ZAR126.1m, or US$8.7m at a gold price of US$1,770/oz and a forex rate of
ZAR14.50/US$, or ZAR0.063/share, US$0.005/share or £0.003/share.
 Project capital of ZAR320m (US$22.1m at ZAR14.50/US$) to be funded internally and from
existing facilities.
 A real, post-tax internal rate of return of 26.6% (based on Phase 1 cash-flows only).

While not large by the standards of some of Pan African’s other recent projects, the 8 Shaft no. 2
decline 24 Level project will extend the 8 Shaft Pillar project’s 2.5-year life by a minimum of another
2.5 years at approximately the same level of production of c 34,000oz per annum.

As a consequence of the positive concept study on Mintails/Mogale and the group’s assessment of
the opportunity provided by the 24 Level project at Evander, Pan African has now reprioritised its
capital expenditure programmes as follows:
 It will now implement a phased approach to the development of the Egoli project, entailing
significantly reduced upfront capital expenditure and thereby materially reducing the
requirement to raise debt to fund the project.
 It will complete a pre-feasibility study (PFS) on the Mintails’ assets in Q3 of CY21 and a
definitive feasibility study in Q1 of CY22.
 It has commenced preparatory work for the mining of the 24 Level project.

Full details regarding Pan African’s growth projects will be released in due course, in particular with
respect to the phasing of the development of the Egoli project. Until such time as these details are
known, Edison is maintaining its valuation of Pan African (below) based on its prior assumptions
regarding its growth projects’ developments. However, it is not unreasonable to assume that any
refinements to the projects’ timings and developments should be value adding and, in that respect,
Edison’s valuation (below) could be regarded as being conservative.

Updated (absolute) valuation

In the light of PAF’s operational update for FY21 and fractionally revised external factors such as
the gold price and forex rates, our absolute value of the company (based on its existing four
producing assets plus Egoli) has increased very slightly to 36.52c/share (cf 36.42c previously), on
the basis of the present value of our estimated maximum potential stream of dividends payable to
shareholders over the life of its mining operations (applying a 10% discount rate):

Pan African Resources | 21 July 2021 6

 Exhibit 5: PAF estimated life of operations’ diluted EPS and (maximum potential) DPS*

15.00 50.00

US cents per share (EPS & DPS)

US cents per share (valuation)

10.00 40.00

5.00 30.00

0.00 20.00

-5.00 10.00

-10.00 0.00
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
EPS (cents) Potential dividends (cents) Discounted dividend valuation (cents)

Source: Pan African Resources, Edison Investment Research. Note: *From FY24. Excludes discretionary
exploration investment.

Including its other potential growth projects and assets (ie the residual Evander underground
resource and its shareholding in MC Mining), our updated total valuation of PAF is as follows:

Exhibit 6: PAF absolute valuation summary

Project Current valuation Previous valuation
(cents/share) (cents/share)
Existing producing assets (including Egoli) 36.52 36.42
Fairview Sub-Vertical Shaft project 1.13 1.13
Royal Sheba (resource-based valuation) 0.43 0.40
Mintails/Mogale purchase consideration* 0.17 0.17
8 Shaft no. 2 decline 24 Level project 0.45 0.00
MC Mining shares 0.06 0.07
Sub-total 38.76 38.19
EGM underground resource 0.22–5.24 0.22–5.24
Sub-total 38.98–44.00 38.41–43.43
Mintails/Mogale project execution upside 5.08 N/A
Total 44.06–49.08 38.41–43.43
Source: Edison Investment Research. Note: Numbers may not add up owing to rounding.*Acquisition of
Mintails/Mogale is agreed, subject to due diligence

Of particular note to readers is the increase in the valuation of Pan African’s interest in
Mintails/Mogale on the basis of its fatal flaw analysis and high-level financial evaluation of the
project (see above). Self-evidently, this valuation is contingent upon Pan African concluding its
agreed acquisition of these assets and its subsequent development of them.

Historical relative and current peer group valuation

Historical relative valuation

Exhibit 7, below, depicts PAF’s average share price in each of its financial years from FY10 to
FY20, and compares this with normalised HEPS in the same year. For FY21 and FY22, the current
share price (of 16.66p) is compared with our forecast normalised HEPS for FY21 to FY22. As is
apparent from the graph, PAF’s price to normalised HEPS ratio of 5.4x and 4.4x for FY21 and
FY22, respectively (based on our forecasts – see Exhibit 13, below) is very close to the bottom of
its recent historical range of 4.1–14.8x for the period FY10–20:

Pan African Resources | 21 July 2021 7

 Exhibit 7: PAF historical price to normalised HEPS** ratio, FY10–FY22e

25.00

20.00

15.00

10.00

5.00

0.00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Normalised HEPS (cents) Share price (pence) P/E ratio*

Source: Edison Investment Research. Note: *Completed historical years calculated with respect to average
share price within the year shown and normalised HEPS; zero normalisation assumed before 2016. **HEPS
shown in pence prior to 2018 and US cents thereafter.

Stated alternatively, if PAF’s average contemporary price to normalised EPS ratio of 9.1x in the
period FY10–20 is applied to our normalised earnings forecasts, then it implies a share price for
PAF of c 27.9p in FY21 and 34.0p in FY22.

Relative peer group valuation

Over the next two years, PAF remains cheaper than its South Africa- and London-listed gold mining
peers on 66.7% of comparable common valuation measures (20 out of 30 individual measures in
the table below) if Edison forecasts are applied or 50% if consensus forecasts are applied.

Exhibit 8: Comparative valuation of PAF with South African and London peers
EV/EBITDA (x) P/E (x) Yield (%)
Year 1 Year 2 Year 1 Year 2 Year 1 Year 2
AngloGold Ashanti 4.1 3.9 7.8 6.9 1.9 2.1
Gold Fields 4.1 4.2 8.8 8.6 3.5 3.4
Sibanye 2.2 2.6 3.8 4.8 7.9 6.6
Harmony 2.9 2.8 4.7 5.5 2.5 2.8
Centamin 3.8 3.5 11.7 12.3 6.3 4.7
Average (excluding PAF) 3.4 3.4 7.3 7.6 4.4 3.9
PAF (Edison) 3.0 2.8 5.4 4.4 4.4 4.5
PAF (consensus) 2.7 2.3 8.9 6.6 2.3 2.3
Source: Edison Investment Research, Refinitiv. Note: Consensus and peers priced at 14 July 2021.

Readers should note that PAF’s P/E ratio and dividend yield, calculated on the basis of consensus
forecasts, appear to suggest that EPS and DPS will both fall in FY21 relative to FY20, which we
believe is unusually pessimistic and especially so in the context of the company’s interim results
(see Exhibit 2).

Otherwise, applying PAF’s peers’ average year 1 P/E ratio of 7.3x to Edison’s forecast normalised
HEPS forecast of 4.24c/share for FY21 implies a share price for the company of 22.6p at prevailing
forex rates, while applying its peers’ average year 2 P/E ratio of 7.6x to our forecast normalised
HEPS forecast of 5.18c/share implies a share price of 28.5p.

Financials
PAF reported that group net senior debt had decreased by 45.5%, from US$62.0m at end-June
2020 to US$33.8m at end-June 2021, a decline of US$28.2m over the course of the full 12-month
period, but a decline of US$26.1m in H221 alone. We estimate that this level of debt equates to a
gearing ratio (net debt/equity) of 14.1% (cf 24.5% at the interim stage) and a leverage ratio (net
debt/[net debt+equity]) of 12.4% (cf 19.7%). This figure is probably not complete in that it will

Pan African Resources | 21 July 2021 8

 exclude IFRS 16 lease liabilities of c US$5.0m and an (albeit negligible) instalment sale liability.
However, it does nevertheless represent the vast majority of the group’s net debt, as shown in the
table below:

Exhibit 9: Pan African net debt, by type (US$m)

Type H221 H121 FY20
Gross debt 89.2 87.8 89.2
Cash & restricted cash (55.4) (28.0) (33.5)
Net senior debt (sub-total) 33.8 59.8 55.7

Restricted cash 0.0 0.1 0.4

Gold loan 0 0 5.7
Less refinance adjustment 0 0 (0.3)
Arranging fees 0 0 0.5
Sub-total 33.8 59.9 62.0

Derivative financial liability 0 9.6

IFRS 16 lease 5.0 4.5
Instalment sale liability 0.2 0.3
Sub-total 65.2 76.4
Source: Pan African Resources, Edison Investment Research. Note: Totals may not add up owing to rounding.

Most notable within the context of the above table is the extinction of the liabilities relating to PAF’s
gold loan and derivative financial instruments in H121, which represented the last vestiges of the
company’s revenue protection hedging contracts, which have now all been terminated.

PAF’s reported year-end net senior debt of US$33.8m is also very close to our prior forecast of
US$29.8m, with the difference being easily attributable to changes in working capital.
Notwithstanding capex commitments, we are therefore continuing to forecast that the company will
achieve net debt free status during the FY22 financial year:

Exhibit 10: PAF previous estimated net debt profile Exhibit 11: PAF current net debt profile forecast, FY17
forecast, FY17 to FY22e (US$000) to FY22e (US$000)

100,000 100,000

50,000 50,000

0 0
US$000s

US$000s

-50,000 -50,000

-100,000 -100,000

-150,000 -150,000
2017 2018 2019 2020 2021 2022 2017 2018 2019 2020 2021 2022

Source: Edison Investment Research, Pan African Resources Source: Edison Investment Research, Pan African Resources

In the meantime, the group’s revolving credit facility (RCF) debt covenants and their actual
recorded levels within recent history are as follows:

Exhibit 12: PAF group debt covenants

Measurement Constraint H121 FY20 H120 FY19 H119 FY18* H118 FY17
(actual) (actual) (actual) (actual) (restated)
Net debt:equity Must be less than 1:1 0.3 0.4 0.6 0.71 0.85 0.78 0.19 0.02
Net debt:EBITDA Must be less than 2.5:1 falling to 1.5:1 by 0.5 0.7 1.6 2.2 3.24 3.73 2.25 0.08
December 2022
Interest cover ratio Must be greater than 4 times rising to 5.1 17.7 10.1 5.8 4.1 3.64 4.61 4.62 19.32
times by December 2022
Debt service cover ratio Must be greater than 1.3:1 3.3 3.4 3.0 1.4 2.85 3.84 1.85 9.11
Source: Pan African Resources. Note: *Subsequently restated.

Pan African Resources | 21 July 2021 9

Exhibit 13: Financial summary
US$'000s 2018 2019 2020 2021e 2022e 2023e
Year end 30 June IFRS IFRS IFRS IFRS IFRS IFRS
PROFIT & LOSS
Revenue 145,829 218,818 274,107 369,020 340,870 364,948
Cost of sales (107,140) (152,980) (158,457) (207,557) (165,540) (171,018)
Gross profit 38,689 65,838 115,650 161,464 175,331 193,931
EBITDA 38,131 65,484 115,176 157,281 170,116 187,681
Operating profit (before GW and except.) 31,506 49,256 93,673 128,520 146,996 155,924
Intangible amortisation 0 0 0 0 0 0
Exceptionals (16,521) 10,596 (28,593) (6,704) (1,730) (1,730)
Other 0 0 0 0 0 0
Operating profit 14,985 59,852 65,079 121,816 145,266 154,194
Net interest (2,222) (12,192) (12,881) (6,153) (3,042) 391
Profit before tax (norm) 29,284 37,064 80,791 122,367 143,954 156,315
Profit before tax (FRS 3) 12,763 47,660 52,198 115,662 142,224 154,585
Tax 2,826 (8,174) (7,905) (40,513) (44,082) (47,266)
Profit after tax (norm) 32,110 28,890 72,887 81,853 99,871 109,049
Profit after tax (FRS 3) 15,589 39,486 44,293 75,149 98,141 107,319
Average number of shares outstanding (m) 1,809.7 1,928.3 1,928.3 1,928.3 1,928.3 1,928.3
EPS - normalised (c) 1.31 1.64 3.78 4.24 5.18 5.66
EPS - FRS 3 (c) 0.87 2.05 2.30 3.90 5.09 5.57
Dividend per share (c) 0.00 0.15 0.84 1.01 1.04 2.50
Gross margin (%) 26.5 30.1 42.2 43.8 51.4 53.1
EBITDA margin (%) 26.1 29.9 42.0 42.6 49.9 51.4
Operating margin (before GW and except.) (%) 21.6 22.5 34.2 34.8 43.1 42.7
BALANCE SHEET
Fixed assets 315,279 361,529 314,968 354,131 396,647 407,980
Intangible assets 56,899 49,372 43,466 45,806 48,206 50,606
Tangible assets 254,247 305,355 270,286 307,108 347,225 356,159
Investments 4,134 6,802 1,216 1,216 1,216 1,216
Current assets 29,009 31,601 53,648 95,461 112,239 215,071
Stocks 4,310 6,323 7,626 12,357 11,372 12,175
Debtors 22,577 18,048 11,245 26,408 24,301 26,018
Cash 922 5,341 33,530 55,449 75,319 175,631
Current liabilities (44,395) (63,855) (78,722) (104,074) (84,082) (137,509)
Creditors (37,968) (39,707) (62,806) (88,158) (108,166) (161,593)
Short-term borrowings (6,426) (24,148) (15,916) (15,916) 24,084 24,084
Long-term liabilities (152,906) (145,693) (106,276) (106,293) (107,579) (109,180)
Long-term borrowings (112,827) (109,618) (73,333) (73,333) (73,333) (73,333)
Other long-term liabilities (40,078) (36,076) (32,943) (32,961) (34,247) (35,847)
Net assets 146,988 183,582 183,620 239,224 317,225 376,362
CASH FLOW
Operating cash flow 5,345 59,822 73,399 132,114 168,427 184,541
Net Interest (6,076) (14,685) (10,834) (6,153) (3,042) 391
Tax (1,634) (4,497) (5,804) (17,418) (20,334) (21,388)
Capex (127,279) (52,261) (30,849) (67,924) (65,636) (43,090)
Acquisitions/disposals 6,319 466 207 0 0 0
Financing 11,944 (0) 0 0 (0) 0
Dividends (11,030) (2,933) (2,933) (18,700) (19,544) (20,141)
Net cash flow (122,411) (14,088) 23,186 21,919 59,870 100,312
Opening net debt/(cash) 3,138 118,332 128,424 55,719 33,800 (26,070)
Exchange rate movements (619) 537 1,663 0 0 0
Other 7,836 3,459 47,856 0 0 0
Closing net debt/(cash) 118,332 128,424 55,719 33,800 (26,070) (126,382)
Source: Company sources, Edison Investment Research

Pan African Resources | 21 July 2021 10

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